Cliffs Natural Resources Inc (NYSE:CLF) is a cigar butt that’s for sure. The company’s shares have collapsed since 2009, falling 38%, excluding dividends, while over the same period the S&P 500 (INDEXSP:.INX) has jumped 95%. Over the same period the company has gained a terrible reputation for misallocating capital and instigating unsustainable dividends.
However, the recent intervention by activist hedge fund, Casablanca Capital, which now owns more than 5% of the Cliffs Natural Resources Inc (NYSE:CLF), could mark the beginning of a new era.
Casablanca pushing for change at Cliffs Natural Resources
Casablanca wants to instigate several changes at Cliffs Natural Resources, designed to unlock value after years of mismanagement.
First and foremost, Casablanca intends to divest Cliffs’ Asian assets. The activist fund claims to have received unsolicited expressions of interest for these assets.
Secondly, with funds received from the sale of Asian assets, Casablanca intends to finance Cliffs’ obligations at its giant North American Bloom Lake mine – Cliffs’ multi-billion dollar mistake – unleashing the mine’s full potential.
And thirdly, Casablanca intends to refocus Cliffs Natural Resources Inc (NYSE:CLF)’s strategy on North America. Cliffs already owns a host of attractive North American assets. Casablanca believes that Cliffs’ remaining US business can hold its own and has enough iron ore for 40+ years of mine production. Existing facilities could enable Cliffs to leverage its experience within North American to establish attractive economies of scale and become the largest iron ore producer within the US. There has also been a debate about the possibility of morphing Cliffs’ North American assets into a master limited partnership.
Until last week these ambitions were just a pipe dream. But last week Casablanca succeeded in achieving a majority representation on Cliffs’ board, first step in the activist fund’s strategy of instigating change. All six Casablanca nominees were elected to Cliffs’ board of directors, which seats 11 in total. With men on the inside, Casablanca will be able to push for change.
One of the newly-elected board members, Lourenco Goncalves purchased 50,000 shares in Cliffs’ prior to the AGM, which showed that he already has more faith in Cliffs’ future than the current management team — the current/previous team acquired no shares in Cliffs for cash, they only held shares awarded by incentive. According to Credit Suisse, Mr Goncalves is almost certain to replace Cliffs’ current CEO, Gary Halverson after winning a seat on the board.
Still, Cliffs Natural Resources Inc (NYSE:CLF) is going to need more than just a new management team to help it recover. The company has suffered from falling iron ore and coal prices over the past few years, two factors that are completely out of its control. Nevertheless, management’s systematic destruction of shareholder equity over the same period has equally contributed to poor performance. Casablanca notes that almost all of Cliffs’ current board have been in place while the company has destroyed nearly $9 billion of shareholder value.
Breaking down; $6.4 has been wasted on the Bloom Lake acquisition, which has so far failed yield results and is, in fact, due to costly take-or-pay agreements is burning through cash; $1.2 billion was spent on coal projects that are not expected to break even until this year (Cliffs is now closing some coal mines); $500 million was spent on a Chromite project, suspended during the second quarter of 2013; $285 million was spend on the Wabush project, idled during the first quarter of this year, and finally, the Amapa project, acquired for $500 million but sold for a ‘nominal amount’ during the third quarter of 2013.
With the board now controlled be Casablanca, working in favor of shareholders, costly mistakes such as those above should be minimized.
For those looking on more information regarding the Cliffs Natural Resources Inc (NYSE:CLF) saga, the daily, ‘Stocks to Watch’ column by Barrons is an essential stream of information. Cliffs’ stream can be found here.
Stay tuned for part two…